After tax vote, what should Alaskans watch for?
A fleet of cranes hoist the Point Thomson pipeline into place during construction this past winter, eventually making the connection to the Trans-Alaska Pipeline System. Point Thomson is the first piece of a large Alaska LNG export project, which now enjoys more certainty after the state’s new oil production tax was upheld by Alaska voters in the Aug. 19 primary.
With the divisive debate over oil taxes behind us, for now at least, what should Alaskans watch for?
Getting new oil into the Trans-Alaska Pipeline System is the most important thing. Alaskans should also closely watch how the new tax performs in terms of revenue.
A recent decline in oil prices has raised some concern for revenues although this would have affected revenues under either the former ACES tax or the new tax law passed as Senate Bill 21.
Alaska North Slope oil prices have been trending down, closing at $99.80 per barrel on Aug. 27, down from $111 per barrel July 1.
Oil producers have said that retaining oil tax reform, enacted in 2013 and which took effect Jan. 1, would lead to new investment and more oil into the pipeline to offset the production decline.
New investment and some new production, over what was forecast, is already happening, but what additional milestones are there?
Mainly, those would be the several new oil projects announced in the last year. Alaskans should watch to see if they are actually built.
An important milestone will be later this year when the ConocoPhillips board of directors meets to approval the company’s capital investment budget for next year. There are three new North Slope products up for approval.
These include two on the Kuparuk River field, Drill Site 2S, a new production pad in the south part of the Kuparuk field, and the North East West Sak, or NEWS, a project to expand the existing West Sak viscous oil project in the Kuparuk field.
Assuming the NEWS project is given a go-ahead, it is expected to produce 9,000 barrels per day with a startup in 2017.
ConocoPhillips did preliminary gravel placement for the DS 2S project last winter but final development must be approved by the company’s board. It is expected to begin production in 2016, with a peak of 8,000 barrels per day.
The third project is Greater Moose’s Tooth 1, or GMT-1, ConocoPhillips’ planned new oil project in the National Petroleum Reserve–Alaska. A federal supplemental environmental impact statement being prepared by the U.S. Bureau of Land Management is due to be finalized later this year. GMT-1 is expected to produce 30,000 barrels per day.
With new production from these three projects laid over the existing fields’ output, and accounting for some decline in the existing fields, ConocoPhillips said that it expects to add 40,000 barrels per day of new production to its North Slope production by 2018.
BP is also working on its Prudhoe Bay west end development, although formal approvals from the board must also be given for that project. If it proceeds, it will add 40,000 barrels of new production beginning in 2018, the company has said.
There are two other, smaller projects to keep an eye on.
One is Brooks Range Petroleum’s small Mustang field development, which is to begin producing at an initial rate of 9,000 barrels per day in 2016 and increasing to 12,000 barrels per day in 2017. It is likely that other small oil deposits near Mustang will be developed once the field infrastructure is in place.
The oil processing facility being built for Mustang will have a capacity of 15,000 barrels per day.
Another project is Caelus Energy’s Nuna development near the Oooguruk field, which Caelus purchased from Pioneer Natural Resources earlier this year. Nuna is expected to produce about 15,000 barrels per day.
The company has not released a timetable for development but some preliminary gravel work is expected this winter.
Meanwhile, two other large projects were underway before the vote on the production tax are ConocoPhillips’ CD-5 project and the Point Thomson gas and condensate project east of Prudhoe Bay. These will be producing by 2016.
CD-5 is to begin production in late 2015 with a peak production of 15,000 barrels per day. Meanwhile, Point Thomson will begin producing 10,000 barrels per day of liquid condensates in 2016.
Not including BP’s west Prudhoe project, which will produce after 2018, the projects listed above total to about 100,000 barrels per day of new oil by 2018.
However, there will also be continued decline in the existing fields, although that may be mitigated by “workovers” of older producing wells and the drilling of new wells in the older fields.
Based on these announced projects, state officials are cautiously optimistic that the production from the North Slope can be held level and perhaps increased by a small amount.
The decline was actually halted last year due to increased activity on the slope. Production averaged 531,000 barrels per day in fiscal year 2014, the state financial year ending June 30, which was about the same as it averaged the previous year.
Historically production has been declining at rates of about 6 percent yearly.
On the revenue impacts of the new tax, the important milestone is the Department of Revenue’s next revenue forecast due out in late November or early December.
That will be the department’s first estimate under the new tax after it has been in effect for nearly a full year.
It will forecast revenues for the current fiscal year and the 2016 fiscal year. Revenues will be most affected by three factors that are very dynamic: oil prices, the estimated per-barrel production cost and the number of barrels expected to be produced.
If oil prices are lower, and production costs higher, the per-barrel net value of the oil will be reduced, resulting in lower revenues. This would happen under the new and oil tax as both are based on the net value per barrel.
However, this would be offset by more barrels being produced over what was previously estimated. More barrels means not only more production tax revenue but also higher royalty payments to the state.
How these would balance out would be displayed in the revenue department’s forecast later this year.
Tim Bradner can be reached at email@example.com.